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Mapping external debt vulnerabilities: An Update

Debt dynamics are deteriorating for developing countries due to repeated shocks over the last four years. The stock and cost of debt have increased significantly, and global interest rates have risen to unprecedented levels. This note analyses the impact of these changes on developing countries.

With simple assumptions on future exchange rates, interest rates, primary balance and growth, it is likely that external debt service burdens will continue to rise until 2024-25. For the median low-income country, external debt service will reach 15% of government revenues in 2023 and only slightly decline¬¬ until 2028. Lower-middle income countries will require particularly large financing in 2024 and 2027, with median debt service to revenues jumping from 12 to 15% in 2024. This is a median, by definition, many countries will have much larger debt cost pressures. We compute that 26 of the countries considered are likely to owe more than 20% of their government revenues in debt service in the coming years. The present value of debt will also increase considerably – more than 5 percentage points in 4 years – if interest rates remain high, as countries roll over their obligations.

Using the IMF/World Bank’s risk thresholds as benchmarks for risk levels, we find that a large set of developing countries will face two types of risks. 19 countries already had high external debt levels in 2022 (about 55% of GDP at present value). This does not mean that they are insolvent, but that they will need sustained policy efforts to avoid debt distress. Another 24 countries will face “flow” problems between 2023 and 2028, meaning they will have to pay high external debt service at least once during that period. In aggregate, $75 billion of debt service is at risk per years. Moreover, in our pessimistic scenario, those flow concerns turn into high debt stock before 2028, for 6 countries, often among the larger lower middle income countries, with contagion risks. […]